Background

Prior to the Landlord and Tenant (Covenants) Act 1995 ('the 1995 Act') any landlord or tenant who entered into a lease was prima facie liable for the duration of the term. The contractual liability of the tenant would therefore continue long after the lease had been assigned. The consequence being that tenants could be left in a position where they had assigned the lease, their assignee fell into arrears or caused the property to fall into disrepair and the original tenant would find themselves facing a substantial claim for arrears or damages.

The 1995 Act sought to address this mischief but due to lobbying on behalf of landlords a compromise was achieved namely by section 16 which provided for Authorised Guarantee Agreements ('AGAs') whereby a tenant could enter into an agreement to guarantee the performance of the tenant obligations in the lease for its immediate successor

Another principle of the 1995 Act (section 24 (2)) was that as from the date of the release of the tenant any other person who is bound by a covenant of the tenancy immediately prior to the release is also released from any liability imposed by the tenancy.

This principle was tested in Good Harvest LLP v Centaur Services Ltd [2010] EWHC 330 Ch where the judge had to consider whether a guarantor could be a party to an AGA. It was held that the 1995 Act precluded a guarantor from being required to give a further guarantee in respect of an assignee. This was because if a guarantor was required to enter into a further guarantee then this would frustrate the operation of the 1995 Act, as it would impose obligations on the guarantor equivalent to those which should have been released by section 24(2).

Update

Recently case law has focused on whether the assignor's guarantor can be the assignee of the lease or whether this arrangement is prevented by the 1995 Act. This was the issue in EMI Group Limited v O&H Q1 Limited [2016].

Section 25 of the 1995 Act contains a wide anti-avoidance provision which voids any arrangement that frustrates the purpose of it namely the release of a tenant from its obligations upon assignment and the release of the tenant's guarantor from its obligations on assignment.

As stated above the 1995 Act allows the assigning tenant to provide an AGA (section 16) but it does not allow the guarantor to provide an AGA (GAGA). The guarantor can provide a sub-guarantee (SAGA) where the guarantor guarantees the assignor's performance of its AGA.

It was decided in the EMI case that an assignment from the tenant to its guarantor was void as it frustrated section 25 of the 1995 Act. A previous case (K/S Victoria v House of Fraser) was followed where it was decided that a tenant assignor with a guarantor cannot assign to another tenant who is the guaranteed by the same guarantor entity. It was duly acknowledged that the situation was absurd given the willingness of the parties to effect the arrangement.

Although it is helpful to have further judicial consideration of the 1995 Act it does highlight its fundamental flaws and lack of commercial and/or rational application. A common theme throughout the cases is the fact that it is irrelevant what arm's length professional parties, independently advised, actually want. As Miss Tipples QC emphasised in the EMI case 'the fact such a conclusion is unattractively limiting and commercially unrealistic is neither here nor there". Unfortunately, for many parties it is a major issue. Tenant groups want to be able to restructure their arrangements. There may not be an adequate alternative guarantor. The 1995 Act frustrates this for no justifiable reason. Why should a tenant not be able to assign to its guarantor if they both want this to happen? Similarly, why shouldn't a guarantor of a tenant not be able to guarantee that tenant's assignee?

To discuss this, or other real estate commercial issues please do not hesitate to contact the team.